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Ruling

Subject: share trading software

Question1

Are you entitled to claim a deduction for the purchase of a share trading program?

Answer: No

Question 2

Are you entitled to claim a deduction for the decline in value of a share trading program?

Answer: No

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You purchased a share investment program to install on your computer.

Prior to the purchase of the program you had not brought or sold any shares, and had not owned any shares.

You were able to use the program to simulate the purchase and sale of shares, but were unable to use the program to buy or sell any shares.

You did not receive any after sales assistance with the program.

You have not purchased or sold any shares since purchasing the program.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1 and

Income Tax Assessment Act 1997 Division 40.

Reasons for decision

Section 8-1 of the Income Tax Assessment 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature. 

For a deduction to be allowable under section 8-1 of ITAA 1997 a required nexus must exist between the expenditure and the gaining or producing of assessable income.

As Latham CJ, Rich, Dixon, McTiernan and Webb JJ stated in Ronpibon Tin NL Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47 at 56-57 (Ronpibon Tin case):

'For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing assessable income it must be incidental and relevant to that end. The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income.' [Emphasis added.]

In your case, because you have not produced any assessable income by the use of the share investment program, there is no deduction allowable under section 8-1 of the ITAA 1997.

Furthermore, the cost of programs that provide information about selecting shares and purchasing them is incurred at a point too soon to be incidental and relevant to the earning of assessable income in the future when shares are traded and assessable income is produced by way of capital gains and dividends.

Depreciating Asset

Division 40 of the ITAA 1997 contains the capital allowance provisions which allow deductions for the decline in value of depreciating assets. Under subsection 40-25(1) of the ITAA 1997 you can deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year.

Subsection 40-25(2) of the ITAA 1997 states you must reduce your deduction by the part of the asset's decline in value that is attributable to your use of the asset, or having it installed ready for use, for a purpose other than a taxable purpose.

Subsection 40-25(7) of the ITAA 1997, in part, states a taxable purpose is the purpose of producing assessable income.

In application to your case the share investment software program is considered a depreciating asset. As you do not use the software for the purpose of producing assessable income, you are not entitled to claim the decline in value until such time as you do use it for a taxable purpose.